Minority Shareholders Oppression: Protection and Remedies

The Grumpy Grande company case scenario of five brothers who are shareholders and directors of the same company raises the issue of minority shareholder oppression by majority shareholders. This issue of shareholder oppression is common in private companies. In public companies minority shareholder oppression is very rare since the member can dispose their shares by selling them to the public and walk out of business.

MINORITY SHAREHOLDERS OPPRESSION
PROBLEM QUESTION
INTRODUCTION
The Grumpy Grande company case scenario of five brothers who are shareholders and directors
of the same company raises the issue of minority shareholder oppression by majority
shareholders. This issue of shareholder oppression is common in private companies. In public
companies minority shareholder oppression is very rare since the member can dispose their
shares by selling them to the public and walk out of business. Tim’s brothers’ actions oppress
him through preventing him to sell his shares to outsiders yet the same brothers are not willing to
buy them. The four brothers have also acted unconscionably when they decide to buy all the
assets of the company despite Tim’s protest and refusal to consent. The four brothers’ aim is to
frustrate Tim since they suspect he wants to pull out the business. They target to send him away
without him realizing his monetary benefits for his shares. The above scenario is a typical case of
oppression happening within family businesses which forms bulk of oppression cases in
Australia.1
Issue
Whether four brothers oppressed Tim who is a minority shareholder through their majority
voting power and the necessary statutory and equitable protection available for Tim?
Relevant law
Shareholder oppression through majority voting power of the other shareholders or directors can
be remedied using statutory protection and equitable remedies. The statutory limitations are
provided for under the Corporations Act of 2001 while equitable remedies come from the law of
equity as discussed below.
a) Equitable remedies
1 Dundas lawyers, (2014), Shareholder oppression https://www.dundaslawyers.com.au/shareholder-oppression/
(accessed 18 May 2019)

The law of equity provides remedies such as injunction, order for specific performance and
compensation. These remedies can be granted as claims sought in a suit instituted the oppressed
shareholders. The suit could be on account of violation of personal rights or company interests a
whole. It is easier to sue for violation of individual rights. Initiating a derivative suit on behalf of
the whole company requires proof that the violation affected the company’s interest as a whole.2
The grant of equitable remedies by the court was illustrated in the case of Gambotto and Anor v
WCP Ltd and Anor3 in the case, the Australian federal high court issued an equitable remedy of
an injunction to a majority shareholder. The injunction was meant to stop the majority
shareholders from their action of acquiring the shares of the minority shareholders on a
compulsory basis. The court also issued statutory remedies under statutory protection.4
In Biala Pty Ltd v Mallina Holdings Ltd,5 the plaintiff instituted a derivative suit for violation of
a fiduciary duty that the directors and the chairman of the Mallina company owed to the
company by deciding to abandon the company’s venture and instead working with the
government to start a petrochemical venture.6 The plaintiff who was also a minority shareholder
in Mallina company cited minority oppression due to the majority voting power that the other
directors used to initiate their plans. He claimed for an equitable remedy for breach of personal
rights and was awarded damages in terms of compensation for the loss that he will suffer as a
result of abandonment of the venture.
b) Statutory protection
Corporations Act of 2001 provides for grounds of minority shareholder oppression. Provides for
what can amount to oppression and also gives the appropriate remedies. The grounds include
unfair or unconscionable conduct that is prejudicial to the interest of the whole company.
Discriminatory actions of majority shareholder or mistreating minority shareholders during board
meetings also form part of the grounds. After proving the above grounds, the court will proceed
2 Pamela, H, Ian, R, and Geoff, S (2018) Commercial Applications of Company Law, 19 edition oxford university
printing press
3 Gambotto and Anor v WCP Ltd and Anor (1995) High court of Australia 8 March 1995
4 Ramsay Ian, M, (1996), Gambotto v WCP Ltd: its implications for corporate regulation, University of Melbourne,
Faculty of Law. Centre for Corporate Law and Securities Regulation
5 Biala pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785
6Ramsay Ian, M, & Benjamin B (2006) ‘Litigation by Shareholders and Directors; an Empirical study of the
Australian statutory Derivative Action,’ Journal of Corporate Law Studies vol 6 issue 2

to determine the case and make one or more orders provided for under section 233 of the
Corporations Act 2001.7
The court has a variety of statutory remedies it can order upon establishing the presence of the
above discussed grounds such remedies include changing the company’s constitution to remove
unfair rules, ordering for a company to be wound up, ordering for a company to sell out its share,
placing a company under receivership or compulsory administration, ordering a company to
reduce its capital among others.8 The court established the test for unconscionable conduct in
Morgan v 45 Flers Avenue Pty Ltd9. The court explained that test is that of a normal commercial
bystander’s view. The commercial bystander should view the act as too oppressing to the extent
that a normal director would not take that route of action on other directors or shareholders.
The case of Scottish Cooperative Wholesale Society Ltd v Meyer10illustrated statutory protection
provided for in the United Kingdom under section 210 of the Company Act of 1948. The case set
a leading president on the duty of the shareholders. The court in the above case held that it is the
duty of the company director to protect the interest of the company as a whole and note
individual member interests. Protecting the interest of the company as a whole covers a wider
scope capturing the interests of everyone including those of a shareholder. Majority shareholders
should not advance their own interest in the name of the company interest since that amounts to
duty to act for the individual interests hence violation the duty to act in the company’s interest as
a whole.
Application
The four brothers’ actions are unconscionable, unfair and prejudicial to Tim’s interest in the
company. Preventing Tim form selling his shares amounts to unfair conduct under section 232
hence warranting Tim to seek remedies provided for under section 233. The actions also entitles
Tim to seek equitable remedies of compensation and injunction to stop his brothers from
acquiring all the company assets at a cheap price and all the shares free of charge without paying
any cent to Tim. In Menier v Hooper Telegraph works,11 the court established a test to determine
7 Corporations Act 2001 s 232
8 Corporations Act 2001 s 233
9 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, 704
10 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
11 Menier v Hooper’s Telegraph Works (1874) L.R.9 Ch. App. 350

whether a minority shareholder’s claim had been properly instituted from the case circumstances.
Menier who was a substantial shareholder in a European company had procured a concession to
lay cables in South America. Hooper Company used its majority voting rights and diverted the
concession to another company. The court held that a minority shareholder’s claim of oppression
was properly instituted from the circumstances.
In Wayde v New South Wales Rugby League Ltd12 the court set the test of what amounts to
oppression. According to the ruling the court found out that oppression can only be established
where the board of directors or majority shareholder are acting capriciously and not in good
faith. The court also established that that an action of the board will amount to oppression if not
bonafide. A bonafide action is one provided for by the company constitution and endorsed by the
company members through a resolution. In the above rugby league case, the actions of the board
to deny the ‘wests’ from the league were bonafide and justified because the board is granted the
power to regulate the competitor joining the league hence cannot be held liable for oppression.
The board was simply exercising its mandate to govern and regulate the rugby league in New
South Wales.
Tim therefore can prove oppression based on the above case tests that were brought out in
various cases discussed above. He can institute a court case under equity and pursue for a
remedy of injunction barring his brothers from acquiring all the company assets including his
assets since the act is malicious, prejudicial, and unconscionable and meant to kick Tim out of
business without compensation. Alternatively still under equity, Tim may decide to leave the
company empty handed as his brothers wish but sue for compensation of loss suffered which is
to be quantified at the market value of his shares then paid to him
Under statutory protection Tim has an array of remedies once he proves in court the grounds
stated under section 232 of the Corporations Act 2001. The grounds required to be proved are
exactly the actions his four brothers were planning to undertake. The actions include unfair
conduct of taking his shares without payment and buying all the company assets at a cheaper
price through majority endorsement power which they already have at the expense of Tim.
Statutory protection under section 233 can therefore be invoked ordering the change of the
company constitution to limit his brothers’ malicious actions. Another remedy is for the court to
12 Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459

control the conduct of the company to avoid oppression. The control could be exercised through
the use of an independent administrator appointed by the court. The court could still make any
other appropriate orders relevant to the case circumstances.13
Conclusion
The case of Grumpy Grande Company manifests an array of issues discussed under minority
shareholder oppression by the majority shareholder. In the case scenario Tim is the minority
since the other four brothers have teamed up to eliminate him from the business without
compensation. The oppression is manifested in the action of preventing Tim from selling out his
shares to another person outside the company. Despite the shares being blocked from access by
an outsider the brothers are no longer willing to buy the same shares and want Tim out without
securing compensation for his shares.14 It is unfair and illogic for the brothers to sell all the assets
to themselves at a cheaper price in spite of Tim’s protest. The brothers’ decision was based on a
selfish individual interest and not for the company interest. Everything they deed and though of
doing is a to frustrate Tim and chase him out of business was a straight forward ground under
section 232 of the Corporations Act 2001.
Tim has both equitable and statutory remedies at his disposal. He can decide to combine both
remedies for better results of the case. Under equitable remedies he can institute a court case
claiming violation of individual rights to own his shares and being disfranchised from the
ownership of the company property. Upon raising the above claims, he may therefore seek for
injunction order restraining his brothers form acquiring shares from him without compensation
and another restriction barring his brothers from buying the company assets at a cheaper
disfranchise Tim form company assets ownership. Still under equitable remedies, Tim can
decide to walk out of the business in peace and institute a case claiming for compensation of loss
suffered due to loss of his shares in the company.15
13 Redmond, P (2013) Corporations and Financial Markets Law 6th edition, LBC
14 Oxbridge Notes, Shareholders Remedies Notes, class 17 on protection of minority shareholders, https://en-
au.oxbridgenotes.com/revision_notes/law-university-of-new-south-wales-business-associations-1/samples/
shareholders-remedies
15 Gettler L, (2014) A new remedy for family business oppression, The Australian Business Review
https://www.theaustralian.com.au/business/business-spectator/news-story/a-new-remedy-for-family-business-
oppression/9dfb8f4b254ba20d0082d9a9f326e9ab (accessed 18 May 2019)

Statutory protection is also another powerful remedy that Tim can explore pursuant to section
232 and 233 as discussed above.16 The remedies provided for by the statute includes restricting
shareholder’s actions, reducing the company’s capital, ordering for sell out of its shares and
changing the company constitution to wipe out malicious clauses among others as discussed
above. Where the oppression is so grave to the extent that it cannot be rectified the court may
decide to put the company under receivership or order for it winding up17
References
Gambotto and Anor v WCP Ltd and Anor (1995) High court of Australia 8 March 1995
Biala pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785
16 Federal Register of Legislations, https://www.legislation.gov.au/Details/C2018C00031 (accessed 18 May 2018)
17Victorian Law Reform Commission, The Oppression Remedy in the Corporations Act
https://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act (accessed 17 May 2018)

Menier v Hooper’s Telegraph Works (1874) L.R.9 Ch. App. 350
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, 704
Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459
Corporations Act 2001
Ramsay Ian, M, (1996), Gambotto v WCP Ltd: its implications for corporate regulation,
University of Melbourne, Faculty of Law. Centre for Corporate Law and Securities Regulation
Redmond, P (2013) Corporations and Financial Markets Law 6th edition, LBC
Pamela, H, Ian, R, and Geoff, S (2018) Commercial Applications of Company Law, 19 edition
oxford university printing press
Ramsay Ian, M, & Benjamin B (2006) ‘Litigation by Shareholders and Directors; an Empirical
study of the Australian statutory Derivative Action,’ Journal of Corporate Law Studies vol 6
issue 2
Dundas lawyers, (2014), Shareholder oppression
https://www.dundaslawyers.com.au/shareholder-oppression/ (accessed 18 May 2019)
Federal Register of Legislations, https://www.legislation.gov.au/Details/C2018C00031 (accessed
18 May 2018)
Victorian Law Reform Commission, The Oppression Remedy in the Corporations Act
https://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act (accessed 17
May 2018)

Gettler L, (2014) A new remedy for family business oppression, The Australian Business Review
https://www.theaustralian.com.au/business/business-spectator/news-story/a-new-remedy-for-
family-business-oppression/9dfb8f4b254ba20d0082d9a9f326e9ab (accessed 18 May 2019)
Oxbridge Notes, Shareholders Remedies Notes, class 17 on protection of minority shareholders,
https://en-au.oxbridgenotes.com/revision_notes/law-university-of-new-south-wales-business-
associations-1/samples/shareholders-remedies